Scott Marshall, top, of Calhoun, Ga., files for unemployment in Dalton, Ga., in this photo from last month. (David Goldman/AP/File)

Georgia has set up a showdown with the Obama administration over how deeply states can cut jobless benefits by refusing to give school bus drivers and lunch ladies unemployment benefits during their summer breaks.

The issue echoes beyond Georgia because other states including Pennsylvania, Michigan, Missouri, and Arizona have trimmed unemployment benefits in various ways to rein in costs. Florida, for example, has a proposal to require drug tests for recipients to be eligible for benefits, while other states have reduced the total number of weeks that benefits can be received.

For its part, the Georgia unemployment insurance fund is broke, owing Washington more than $700 million for money it borrowed during the recession – adding to Georgia Labor Commissioner Mark Butler‘s sense of urgency.

But his open defiance of a US Labor Department order to restore unemployment benefits to seasonal workers is seen as the boldest move yet by a cash-strapped state. The Labor Department has responded by threatening to withhold the $72 million it pays Georgia annually to administer the program.

Mr. Butler has called it a states’ rights issue, contending he within his rights to refuse payment because the people aren’t technically unemployed; summer breaks are a part of their contracts and they don’t receive new contracts until the fall. But these 4,000 school bus drivers, janitors, pre-K teachers, and landscapers have traditionally received jobless benefits during the summer and have budgeted for it, creating hardships.

What Georgia is doing “is unusual because most states don’t want to threaten all their funding in a situation where it’s pretty clear that they’re on the wrong side of the law,” says Maurice Emsellem, a policy director at the National Employment Law Project in Washington. “But it also points to similar concerns in other states, especially those states with serious loans” from the federal government.

Last month, Labor Department officials charged that Butler’s view is without “adequate statutory basis.” Butler responded Friday, telling the Atlanta Journal-Constitution: “We will not back down from something we feel right about. We have the authority to write laws when it comes to unemployment.”

The Labor Department is “reviewing Georgia’s new legal position,” a spokesman told the Journal-Constitution.

Other states have addressed the same issue in different ways. Several states have passed legislation targeting seasonal private-industry employees like symphony musicians. South Carolina, meanwhile, is forcing claimants to make at least one of their work searches through a state online system.

Governors and statehouses are “basically doing all they can to make it more difficult for unemployed workers to get the benefits that they are due,” says George Wentworth, a former general counsel for the Connecticut Department of Labor.

That trend is having an effect. In Florida, for one, only 16 percent of unemployed are now eligible for unemployment insurance. As Congress, too, has begun to pull back benefits, the number of laid-off workers receiving extended unemployment insurance directly from Washington has declined from 1.1 million in October 2010 to 473,000 today.

In a white paper last year, the Obama administration suggested that if federal emergency-unemployment programs weren’t extended, large numbers of people would start dropping out of the workforce, becoming a further drag on the recovery. Those fears seemed reflected in Friday’s unemployment report, where the unemployment rate dropped from 8.3 to 8.1 percent mostly because nearly 400,000 people left the workforce, compared with 91,000 who found non-farm jobs.

As the long-term unemployed finally lose their benefits and as states cut back, many former workers have joined record numbers of Americans applying for Social Security Disability Insurance, the rolls of which have increased from around 7 million in 2007 to 9 million today, with nearly 3 million new applicants last year alone. Food stamp use, too, is at record highs.

Researchers “find that applications for [Social Security disability] by unemployed works older than age 50 increase as these workers get close to exhausting their unemployment benefits,” writes the White House in a position paper on extending emergency benefits. “This increase is driven by applications from individuals with limited assets,” meaning those who wouldn’t be able to come up with $5,000 to cover an unexpected emergency.

The bottom line, say economists, is that an already dire situation for millions of idle Americans is threatening to get worse. Attempts in Georgia to curb benefits, for example, come as the state’s unemployment rate inched up to 9.3 percent.

At the same time, pressure on states to curb unemployment benefits will also continue to build as long as “we’re stuck in this really low growth equilibrium,” says Edward Stuart, an economist at Northeastern Illinois University in Chicago.